Alibaba: The House That Jack Ma Built pdfdrive com

Goldman Invests
Meanwhile, in Hong Kong, shortly after their unsuccessful fund-raising trip to
Silicon Valley, Joe had started negotiations with Transpac, a Singapore-based
fund, about investing in Alibaba. Soon they had agreed to a term sheet that
would value Alibaba at $7 million.
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But Transpac insisted on an onerous
provision
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 and Joe wanted to walk away.
He then called up a friend at Goldman Sachs. Like Joe, Shirley Lin was
born in Taiwan and educated in the United States. The two had met a decade
earlier. For Alibaba it would prove to have been a fateful encounter.
In the summer of 2015, I met up with Shirley in New York to talk about
Goldman Sachs’s transformative investment in Alibaba in 1999. Shirley and I
have known each other since 1999. We had been classmates at Morgan Stanley,
the investment bank we joined fresh out of college. While I stayed on at Morgan
Stanley, Shirley had left after a few years for Goldman Sachs to start making
investments in technology and Internet companies across Asia.
Ten years before the Alibaba deal, Shirley and Joe had met by chance on a
long plane ride from Taipei to New York. “I was going back to Harvard, he was
going back to Yale. We were seated adjacent to each other.” She remembers
Joe’s face was buried for most of the trip in a book on constitutional law. He
remembers Shirley intently reading the 
Wall Street Journal,
cover to cover.
After a while they struck up a conversation. Contemplating the books and exams
that awaited them back at college, “pretty soon we were both lamenting each
other’s fate,” Shirley told me.
As Jack and Joe had already discovered, there weren’t many investment
firms in Asia with much experience in technology companies. In 1999, Shirley
was already busily placing bets
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on China Internet companies, ultimately
investing in all three portals. Goldman invested directly in Sina and NetEase,
and indirectly in Sohu.
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Goldman had given Shirley and her team a lot of leeway, provided she kept
the investments below $5 million. This was peanuts to Goldman, whose
Principal Investment Area (PIA) unit would make $1 billion in investments in
tech companies from 1995 to 2000, one-quarter in companies based in Asia.
With so few funds already on the ground in Asia, Shirley was bombarded
with requests for investment from her Harvard classmates and other friends
pursuing the new wave of dot-com riches. The quality of the business plans was
pretty low, often simple copy-and-paste jobs. Shirley and her team worked

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around the clock, wading through stacks of pitch documents, investing, she
estimates, in less than one in a thousand.
While the easy route was to invest in companies with at least one known
quantity—founders who were classmates or friends—for the China Internet story
Shirley had a strong preference in finding homegrown talent. “I really thought
that to invest in China, you have to know the local market.”
But scouring through China start-ups had its drawbacks. Traveling on
unpaved roads in provincial cities, Shirley felt more like a loan officer with the
Asian Development Bank than an investment banker. She also had a hard time
being taken seriously: “Even though we were at Goldman, people in China
didn’t know who we were. They asked, ‘Are you Mrs. Goldman? Are you
married to the owner of this business?’ They thought Goldman and Sachs were
two people who owned the company, and I must be married to one of them.”
So when Joe Tsai approached her about a start-up run by a local
entrepreneur in Hangzhou, she was interested, particularly when he told her he
planned to join the company. Shirley decided to fly up from Hong Kong to
Hangzhou to meet Jack in late September 1999.
Jack, she recalled, was “as local as it gets.”
“I went up to the apartment, where they were all working twenty-
four/seven. . . . The whole place stank. Jack’s ideas were not entirely original—
they had been tried in other countries. But he was completely dedicated to
making them work in China. I was moved by what I saw.”
As with Joe before her, Shirley was less impressed by the business itself
than by the team, the real reason she would decide to invest: Who were they?
What was their history? Knowing Joe checked one box. Seeing Jack and the
team in action checked another. “Really, it was all about Jack and his people.”
Shirley remembers being impressed by how hard Jack’s wife, Cathy, was
working. She and Jack toiled away, she recalled, like “revolutionary comrades.”
Alibaba had been approached by other investors, but Shirley knew that the
backing of Goldman would make all the difference for an unknown start-up in
China. They discussed the investment over tea. If Goldman invested, she told
Jack and Joe, she would personally ensure Alibaba was known to the world.
With B2B competitors like MeetChina waiting in the wings and actively fund-
raising, the offer proved too tempting to resist. Shirley negotiated to acquire a
majority stake in Alibaba for $5 million. She headed back to Hong Kong, where
her colleagues Paul Yang and Oliver Weisberg
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 drew up the term sheet for the
investment.
The following weekend Shirley was swimming with her family at the
Repulse Bay beach on the south side of Hong Kong Island when her cell phone

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rang. It was Jack. He really wanted to do the deal but asked Shirley to leave him
more equity. If Goldman took a controlling stake in his company, he explained,
he couldn’t feel like a true entrepreneur. Jack told her how he’d put everything
into the venture. “This is my life,” he said. Shirley replied, “What do you mean
this is your life, you’ve only just started?” Jack explained, “But this is my third
venture already.” Jack finally convinced her. The term sheet for the investment
had been drawn up, but there were brackets around the numbers so it would be
an easy change. Goldman would invest the $5 million for 500,000 shares, half
the company, while retaining veto rights over key decisions.
Just after she had agreed to the new terms, mid-conversation with Jack, she
accidentally dropped her cell phone into the sea. Oops, she thought to herself.
Well, I guess there goes $5 million.
Jack had succeeded in securing a big-name investor in what would prove a
critical step in Alibaba’s story. But he would also come to regret selling such a
large stake in the company, 50 percent, which he would never recoup. In reality,
though, Jack had little choice. He was an unproven entrepreneur based in a
provincial city in China who was negotiating with a huge, global financial
institution. But having already given out a lot of equity to his cofounders and
now 50 percent to investors, he ended up with a much lower share of his
company than many of his peers. Jack would later joke, only half-kidding, that it
was the “worst deal I ever made.”
When Shirley took the deal to her investment committee, which oversaw all
the fund’s investments, she encountered an unexpected snag. They pushed back.
If Goldman invested the full $5 million, the fund would need to gain the
approval of their investors. “Please get rid of some,” they told her. So, Shirley
reduced Goldman’s stake to 33 percent. Now she quickly had to find investors
for the other 17 percent.
Today the thought of having to cast urgently around for buyers willing to
pay $1.7 million for a 17 percent stake in Alibaba, now worth tens of billions of
dollars, is laughable. In the end she brought in Thomas Ng of Venture TDF, who
had met Jack and Joe that summer in Palo Alto, for half a million dollars.
Fidelity Growth Partners Asia came in for another half a million. Joe had already
told his employer that he was going to join a start-up in China. When Joe
informed his boss, Galeazzo Scarampi, that he had found investors and was
going to leave to join Alibaba, Investor AB also came in for a slice. Transpac
rounded out the balance of the $1.7 million investment alongside Goldman’s
$3.3 million.
Some of the investors, including Venture TDF and Fidelity, held on to their
stakes all the way through Alibaba’s 2014 IPO, generating returns of billions of

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dollars.
When the Goldman-led round was finalized on October 27, 1999, the
investment cemented Joe’s authority as Jack’s right-hand man.
The $5 million round led by Goldman was a start, but peanuts compared to
the war chest of the three China portals, who were besieged by eager investors as
the Nasdaq began its vertiginous climb, gaining 80 percent in eight months,
valuing its component companies at $6.7 trillion in early 2000.
All eyes were on the companies who positioned themselves as the Yahoo of
China, as well as the moves of Yahoo itself in China. In September 1999,
Yahoo, then valued at $36 billion, announced a partnership with Founder, the
largest local PC manufacturer at the time, targeting the mainland.
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At the same
time, Sohu, Sina, and NetEase ramped up their fund-raising.
Sina would raise the most, including $60 million in November 1999 from
investors, including Goldman Sachs and SoftBank, putting the company in pole
position for an IPO in the United States. Sohu raised $30 million, its founder
Charles Zhang capturing the mood of the day: “This is a game of spending
money and how fast you can spend money.” Even William Ding at NetEase
relented, raising in two rounds $20 million from investors, including Goldman
Sachs, but not without venting his frustration that now “people never ask you
about your new products. . . . They only ask you, ‘When is your IPO?’”
On October 7 Alibaba tried to grab some of the limelight with a press
conference in Hong Kong to announce a new version of its website and
disclosing that it was open to an IPO in the United States or on the planned
“second board” of the Hong Kong Stock Exchange, the Growth Enterprise
Market.
Caught up in the excitement of Hong Kong, Alibaba also announced that it
would move its headquarters there from Hangzhou. Jack had been spending most
of his time in Hong Kong, working with Joe and some new recruits out of a
conference room in Goldman’s office. The contrast couldn’t have been greater
between Alibaba’s humble, second-floor Lakeside Gardens apartment in
Hangzhou and its new perch atop the gleaming Citibank Plaza skyscraper with
breathtaking views over Victoria Harbor.
To support Goldman’s newest portfolio company, Shirley Lin conducted a
series of interviews with media in Hong Kong, even going on local television
stations to spread the word about Alibaba. “My Cantonese was so bad back then
they had to subtitle me,” she recalls.
When Goldman moved to even shinier new offices atop billionaire Li Ka-
shing’s brand-new Cheung Kong Center, Alibaba signed a lease on its own
impressive (and expensive) new space, the first major outlay from Goldman’s $5

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million that had hit the bank. Alibaba could get down to business.
Its business was simple: to become the leading website in China for
business-to-business leads. To match buyers with sellers, Alibaba organized its
members’ postings into twenty-seven industry sectors, such as “Apparel &
Fashion,” “Electronics and Electrical,” and “Industrial Supplies.” Users could
sign up for free to receive notification of trade deals, and search for offers to buy
or sell within a sector or a geographical area. By October 1999, Alibaba had
signed up more than forty thousand users. Now it had to go for a much higher
quantity of users, while maintaining the quality of the messages tacked onto its
virtual bulletin board.
Most of the sellers on its site were export or trading companies in China,
including a strong representation of firms led by Zhejiang entrepreneurs. The
Internet was still new for many of these firms, but they quickly became loyal
users of Alibaba.com. Many lacked the scale or connections needed to trade
through the state-owned trading companies, and some were located in remote
areas that made traveling to trade shows like the Canton Fair too expensive.
Having grown up among them and served them as clients of Hope Translation
and China Pages, Jack had a keen sense of what these small firms needed: “Most
SMEs [small and medium enterprises] have a very changeable dynamic. Today
they might sell T-shirts, tomorrow it could be chemicals.”
To attract buyers, Alibaba needed to ensure vendors’ listings were
translated accurately into English. Drawing on the talent pool of university
graduates in Hangzhou, Alibaba started to hire English-speaking editors to
ensure that the posts on the bulletin board were complete, intelligible, and
properly categorized. Leveraging his contacts from MOFTEC in Beijing, Jack
also hired recruits with trade know-how to make the website attractive to foreign
buyers.
Posting on the site, for buyers and sellers, was free—a central tenet of
Jack’s approach throughout his career. His “if you build it, they will come”
approach helped him pull clear of any rivals. If visitors to Alibaba.com were
able to make new trade leads, he figured, they would demonstrate increasing
loyalty, or “stickiness” to the website.
But while free was great for users, it was a tough business model. Alibaba
was vulnerable to any downtime in the Internet funding frenzy. Also, as traffic
grew dramatically on Alibaba’s website, maintaining the quality of postings was
a big job. If Alibaba wasn’t careful it could be overwhelmed. Another challenge
was the increasing competition for talent. In the dot-com boom, skilled
employees constantly jumped ship to rival ventures or, tapping the growing pool
of venture funding, tried their luck at their own start-ups. The cost of talent

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started to spiral upward, including for the software developers, Web designers,
and project managers that Alibaba would need to build out its offerings.
Here Alibaba had two important things going for it: Hangzhou and Jack
Ma. Unlike Beijing and Shanghai, where turnover of qualified employees was a
major headache for entrepreneurs, Hangzhou had a deep pool of fresh graduates
and very few local employers. In addition, Alibaba benefited from Hangzhou’s
relative isolation. There weren’t really any rivals to poach his employees. A few
other technology firms were located in the town, such as UTStarcom or
Eastcom, but in the dot-com craze these were fast becoming “old economy”
ventures. Alibaba also benefited from Hangzhou’s distance from Shanghai—
then some two hours away. For young talented engineers in Hangzhou who
wanted to work for a fast-growing Internet venture, Alibaba was it.
This helped keep costs low, too. For the price of one engineer in Beijing or
Shanghai, Alibaba could hire two. The comparison with Silicon Valley was even
more dramatic, as Jack pointed out: “[To] keep one programmer happy [in
Silicon Valley] takes $50,000 to $100,000. For that much money in China, I can
keep ten very smart people happy all the time.”
As a “second tier” city real estate was cheaper in Hangzhou, too. Even after
Alibaba moved into a 200,000-square-foot office in early 2000, its total rental
bill was just $80,000 a year, a fraction of what it would have been in Beijing or
Shanghai. Jack liked the distance from Beijing: “Even though the infrastructure
is not as good as in Shanghai, it’s better to be as far away from the central
government as possible.”

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